BUCKS; 401(k) Fees Misunderstood

By ANN CARRNS

Published: June 9, 2012

Many employers are clueless about the fees they and their employees pay for operation of their 401(k) plans, a recent report from the Government Accountability Office finds.

Understanding 401(k) fees is important, because they can make a big difference in the amount workers eventually have available for retirement.

New rules from the federal Department of Labor, requiring mutual fund companies and other retirement plan administrators to disclose more information about fees, are scheduled to take effect this summer.

The rules appear to be sorely needed, as the G.A.O. report found that there appears to be widespread misunderstanding among employers about all sorts of fees -- particularly indirect fees paid by plan providers to other companies -- that go along with retirement plans. The G.A.O. prepared the report for the House Committee on Education and the Workforce. The report is based, in part, on a survey of 365 administrators of different 401(k) plans. The margin of sampling error is plus or minus eight percentage points.

Half of employers, for instance, admitted they did not know if they or their workers were paying investment management fees, or mistakenly believed such fees were waived. Such fees account for most of the total 401(k) fees, the G.A.O. noted.

One employer with a large retirement plan -- 15,000 participants and $100 million in assets -- told researchers that its plan didn't pay any trading or transaction costs, like commissions. But a review of the plan's document by BrightScope, a financial services company that tracks 401(k) data, estimated the plan was actually charged more than $310,000 in transaction costs, the report said.

In one example cited in the report, an employer reported that its plan -- through both the company and its employees -- paid a total of $3,800 for record-keeping, or the tracking of individual employee contributions. But when revenue -haring agreements were included, the plan actually paid $62,000, the report found.

Failure to understand such arrangements can have a big impact on the plan, the G.A.O. said. That's because record-keeping fees, under a revenue-sharing arrangement, can be based on the amount of plan assets under management. So, the amount paid could increase as the fund grows, ''and may get quite large'' if the employer is unaware of them. The plan could keep paying more and more as assets grow, even though the level of service provided remains the same, the report said.

The G.A.O. prepared a video to explain how revenue-sharing fees work.

Are you concerned about how plan fees might be affecting your retirement savings? If so, have you approached your employer to discuss the fees or suggest changes?

This is a more complete version of the story than the one that appeared in print.